Straight-through processing (STP) is an integrated approach to achieve hands-off, end-to-end processing of securities transactions without manual intervention or redundant handling. STP has been a goal of the securities industry for years, but a sense of urgency to achieve STP has been brought about by a convergence of changes in a rapidly evolving financial marketplace. These changes include: increased cross-border trades, extended trading hours, decimalization of securities prices, the Securities and Exchange Commission (SEC)'s “hovering mandate” requiring T+1 (trade date plus one day) settlement of domestic equities by mid-2002, and the general pressure to meet rising customer expectations of speed and value in the Internet economy.
The rapid changes in the securities industry have a variety of implications, ranging from an explosion in transaction volumes to increased operational speed and complexity. However, a common denominator is compressed time frames, as manifested in shorter settlement cycles and the demand for real-time information. The increasing speeds at which transactions take place has significant implications for the industry as a whole and for individual players in the marketplace.
Current automated systems which connect financial market players (i.e. investment managers, broker-dealers, banks, financial instrument depository organizations, and infrastructure service providers), currently require three days (T+3) to clear a transaction (that is, have the money change hands and stock ownership records changed). The underlying computer and telecommunications systems infrastructure at each of the major players is complicated by such factors as each player's accounting system (needed to provide legally required records and to support payment of the players for their efforts), by complex “authorization & verification” protocols (between the computer systems of the various players), and by the many manual processes and legacy hardware and software in use. Such systems cannot be easily modified to accommodate a one day closing (T+1) process. As explained in more detail below, the exponential growth in the trading volumes in the U.S. stock markets in terms of shares traded and money involved (fueled in large part by the growth of the Internet, 24 hour trading capability, etc.) have created such a staggering amount of money (float) attendant to the three days clearance process, that the Securities & Exchange Commission has encouraged the creation of a one day clearance cycle (T+1) in order to minimize this float with the recommendation that this process be implemented by June 2002. While this is not deemed to be a firm date it is a target proposed by the SEC and various consortia of trading members, such as the Securities Industry Association (SIA), Industry Standardization for Institutional Trade Communications (ISITC), and other industry groups are attempting to define and build systems to be in place by this date.
The current T+3 clearance process may be visualized with reference to FIG. 2 wherein is shown an exemplary depiction of the processes in the lifecycle of a customer buy-trade of either domestic securities or corporate/municipal bonds initiated and settled in the U.S. domestic market. The assumptions are that all trading is in block form, all securities are immobilized in the depository and all trades are for institutional clients. This Figure is taken from the Securities Industry Association (SIA) White Paper version 1.5, Dec. 1, 1999, entitled “Institutional Transaction Processing Committee” (hereinafter “SIA White Paper”), which is incorporated fully herein by reference. In FIG. 2 an investment manager places an order 201 with a broker-dealer who places an execution request 203 with an exchange. The exchange returns a trade order confirmation 205 to the broker-dealer who calculates the Notice of Execution (NOE) and average price 207 and sends the NOE 209 to the investment manager. The investment manager matches the NOE with the original order 211 and allocates shares among client accounts 213. He then forwards the allocation details 214 to the broker-dealer directing the broker-dealer to allocate the trade among different accounts, and sends a trade notification 215 to the custodian. The investment manager then generates settlement & delivery instructions 217 and passes these 219 to the broker-dealer. The broker-dealer enriches the trade details with settlement instructions, fees, commissions, and tax 221 and generates messages to confirm the trade 223. The broker-dealer sends the trade detail message 225 to the depository who creates a confirmation 227 and sends the confirm message 229 to the investment manager The investment manager matches the confirm data from the depository to his previous allocations 231 and assuming they match he sends an affirm message 233 back to the depository. The Depository sends affirmed confirm messages to the broker dealer 237 and to the custodian 238 and the broker-dealer completes a settlement authorization 240 and returns it 239 to the depository who executes his part of the settlement 241 and notifies the custodian of the settlement 243 and the custodian completes the settlement 245.
Because of the enormous volume of trading activity and the number of interrelated parties involved in a trade, securities firms do not compare and clear trades among themselves. Most transactions are passed over to clearing corporations and depositories that compare and clear the trades. Clearing refers to the processing of payment instructions, and settlement refers to the actual exchange of funds and securities between parties. In the U.S., there are several clearing houses that serve various markets. Trading on the New York Stock Exchange (NYSE), Amex, NASDAQ and some regional exchanges are cleared and settled through the National Securities Clearing Corporation (NSCC); U.S. Treasuries are handled by the Government Securities Clearing Corporation (GSCC). In the options markets, the Options Clearing Corporation (OCC) clears trades for the Chicago Board Options Exchange (CBOE), as well as for the options traded on the NYSE, AMEX, and the Pacific Stock Exchange.
At the present time most of these market players need several days to handle trade/settlement activities. Much of the processing is done by overnight batch processing methods using various computer systems, and each with their own standards, formats, and methodologies. Communications are predominantly single-threaded, point-to-point with a manual focus. And some of the processes are manual processes. In the cross-border trading area there is limited automation, and the clearance process has high failure rates due to limited expertise in foreign market trading and non-dollar instrument handling. Accordingly, there is a technical problem set related to transforming this T+3 process to a T+1 process for clearance of security trades.
Incremental change will not allow the securities industry to adapt. T+1 trade settlement is expected to be a precursor to T+0 settlement. Successful adaptation to the new environment will require structural change. A degree of collaboration must be achieved which allows for STP among players, similar to that found in the payments industry.
Due to the compressed time frames of the industry's STP mandate as well as the rapid pace of technological and marketplace change, there exists a need to phase in significant changes quickly and allocate resources to address the most time critical issues first. Thus, a system and method is needed to evaluate the immediate impact of integrating straight through processing techniques to effect T+1 settlement of domestic equities in a securities processing system. A system and method is also needed to evaluate the longer term impact to a securities processing system presented by T+0 settlement and emerging electronic commerce related business practices.
T+1 evaluation uses a narrower, and more urgent, set of criteria to judge the impact of STP on a securities processing system. T+1 impact is defined as the challenges presented by meeting the more compressed time frames imposed by T+1 settlement of domestic equities. Challenges include the need to support open data standards as defined possibly by the GSTPA and the need to meet shorter settlement cycles. T+0 evaluation, on the other hand, uses a broader, longer term set of criteria to evaluate the impact of STP on a securities processing system. T+0 impact is characterized by not only same day settlement of securities, but also by the broader need for a securities processing system to become an end-to-end electronic commerce enabled enterprise, with Straight Through Processing beginning and ending with the investor or end customer.
The implication is that short term solutions to the T+1 challenge must be engineered to support a longer-term transition to an STP-enabled securities processing system fully connected in the electronic commerce arena, and able to support T+0 settlement. New organizations and systems must be designed that can eventually support same day settlement and dynamic, on-line interaction with customers and business partners. Thus, a system and method of identifying technological and methodological bottlenecks in a securities processing system is needed. In particular, identification of these technological and process inefficiencies may be accomplished through implementation of a system and method for assessing the ability of a securities processing system to apply straight through processing to securities transactions.